Suppliers dim Xbox sales picture

Sales of Microsoft's Xbox video game console are likely to scrape the low end of current company forecasts, based on recent reports involving key component suppliers.

Campbell, Calif.-based chipmaker Focus Enhancements, which last year signed a contract with Microsoft to become a secondary component supplier for the Xbox, said in a financial update statement released late Thursday that Microsoft has yet to order any chips. The Xbox is to use Focus' FS454 chip, which decodes video signals so they can be displayed on a TV screen.

"Microsoft has informed us that although Xbox met its holiday season sales estimates, the unit sales were on the low end of Microsoft's forecasted range, reducing Microsoft's component procurement requirements in the first half of 2003," Focus CEO Brett Moyer said in the statement. "As a result, Focus Enhancements has been told by Microsoft not to anticipate purchases of the FS454 chips for Xbox in the first half of 2003."

Focus said it would provide further details on the Microsoft contract in its fourth-quarter earnings report in early March.

A Microsoft representative said information provided to Focus was consistent with earlier Xbox forecasts.

"Halfway through the fiscal year, it is appropriate timing for Microsoft to review supply orders to account for seasonality as well as unit sales forecasts," the representative said. "At our (second quarter) earnings announcement, we reported that we will end the fiscal year within the sales range originally forecast, but in the bottom half of that range, and for that reason we have asked suppliers to make applicable adjustments."

Nvidia, which supplies the main graphics processor for the Xbox, is also expected to report lower Xbox-related business when it reports results for the fourth quarter and the fiscal year on Feb. 13.

In a Nvidia report released earlier this week, Merrill Lynch analyst Joe Osha cut his estimates for Nvidia's Xbox business. Osha now expects Xbox-related revenue for Nvidia's fourth quarter, which ended Jan. 26, to total $40 million on 800,000 units, down from previous estimates of $85 million on 1.7 million units. "We believe that there are between 1 million and 1.5 million unsold Xbox processors somewhere in the supply chain," he wrote.

For the new fiscal year, Osha expects Nvidia to ship 7.1 million Xbox chips for $328 million in revenue, down from his previous forecast of $410 million in revenue from 8.8 million units.

Microsoft executives said earlier this month that the company is on track to bring total Xbox shipments to about 9 million by the end of the company's fiscal year, June 30. That would bring sales in at the low end of the 9 million to 11 million units the company had forecasted at the beginning of the year, after the console made a slower than expected entry into the highly competitive video game market.

By contrast, market leader Sony recently announced it has shipped more than 50 million units of its PlayStation 2 console to date.